The owner of a luxury yacht will not have its day in court after the Ninth Circuit ruled that it must arbitrate all twelve of its claims against its insurer following a denial of coverage arising out of a crash in Panama. Galilea, LLC v. AGCS Marine Ins. Co., Nos. 16-35474, 16-35475, 2018 WL 414108 (9th Cir. Jan. 16, 2018).

Ultimately, the court held federal maritime law, mandating the enforcement of arbitration clauses in insurance policies, controlled over contrary state law.

The policy in question in Galilea, LLC stated coverage would only apply if the yacht was within the “cruising area” specified by the policy. When the yacht ran ashore in Panama, the insurers denied coverage arguing that the yacht was outside of the area specified in the policy.

The underwriters of the policy then initiated arbitration proceedings in New York pursuant to the terms of the policy. Galilea, for its part, filed a breach of contract suit in Montana. The underwriters responded to the Montana federal suit with a motion to compel arbitration on all twelve of Galilea’s claims.

The luxury yacht owners were two Montana residents who formed Galilea, LLC, which was incorporated in Nevada and in turn purchased the soon-to-be doomed yacht. A central legal argument of the yacht’s owners, as well as the reason they initiated their lawsuit in Montana is that Montana public policy generally invalidates arbitration clauses.

Here, it may be useful to stop and read the disputed terms of the policy:

This insurance policy shall be governed by and construed in accordance with well established and entrenched principles and precedents of substantive United States Federal Maritime Law, but where no such established and entrenched principles and precedents exist, the policy shall be governed and construed in accordance with the substantive laws of the State of New York, without giving effect to its conflict of laws principles, and the parties hereto agree that any and all disputes arising under this policy shall be resolved exclusively by binding arbitration to take place within New York County, in the State of New York, and to be conducted pursuant to the Rules of the American Arbitration Association.

In holding that all of Galilea’s claims were subject to arbitration under the Federal Arbitration Act (FAA), the Ninth Circuit sailed the parties through the sea that is the interaction between federal and state law.

Galilea argued for application of the McCarran-Ferguson Act, which allows state law to prevail over federal law in circumstances where, “(1) a state law is ‘enacted . . . for the purpose of regulating the business of insurance;’ (2) the federal law does not ‘specifically relat[e] to the business of insurance;’ and (3) the federal statute's application would ‘invalidate, impair, or supersede’ state insurance law. Humana Inc. v. Forsyth, 525 U.S. 299, 307 (1999).

However, the Ninth Circuit pointed out states can only regulate under federal maritime law when there has been no established federal rule or statute regulating that particular area. Here, federal maritime law mandates the enforcement of arbitration clauses. Furthermore, the court found Montana has little interest in resolving a maritime dispute seeing as it is a state with no ocean borders.

The court concluded by highlighting the sophistication of the parties in purchasing the underlying policy for the yacht. Sophistication, or lack thereof, is an important factor in all contract disputes, not simply those arising out of insurance policies. The underwriters and Galilea, especially Galilea, were sophisticated and therefore was not unfair to hold each side to what was explicitly agreed upon in the policy. As the court put it, “In light of Galilea's and the Underwriters' sophistication, the agreement to arbitrate according to AAA rules is sufficient to show clear and unmistakable intent to resolve arbitrability questions in arbitration, rather than federal court.”

Needless to say, this case may serve a number of lessons to would be policyholders, especially when seeking insurance to cover luxury or expensive pieces of property. Always read the contract carefully and if you don’t understand something find someone (a lawyer!) to help explain and/or negotiate the document for you.

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